Annuity Case Chills Insurance Agents

By

Leslie Scism

March 18, 2012 5:52 p.m. ET

Last month,
Glenn Neasham,
an independent insurance agent, was ordered to spend 90 days in jail on a felony-theft conviction for selling a complex annuity to an 83-year-old woman who prosecutors alleged had shown signs of dementia.

The agent's conviction, by a state-court jury in Lake County, Calif., is sending shivers down the spines of Mr. Neasham's peers across the country. They can't recall another case where an agent was sent behind bars for selling an annuity.

ENLARGE

Glenn Neasham and his children, Emily and Logan, in February 2009.
Tonya Neasham

Agents "who steal from vulnerable seniors will not get away with their shameful tricks,"
Steve Poizner,
the state's then-insurance commissioner, said in a statement in 2010 when Mr. Neasham was arrested.

Mr. Neasham, 52 years old, maintains the woman appeared fine and wasn't confused at the time of the 2008 transaction and that he acted appropriately. His lawyer has filed notice of appeal, and a bail hearing is scheduled for this week.

The case underlines authorities' continuing discomfort with "indexed" annuities, savings products that pay interest tied to the performance of stock- and bond-market indexes. Insurers guarantee that buyers won't lose any of their principal but in return charge sometimes-steep penalties if investors withdraw their money early, for periods that can stretch beyond a decade.

ENLARGE

Indexed annuities are attractive to agents because of the high commissions they receive from insurers, which can be 12% or more of the invested amount.

But Mr. Neasham's case has led some agents to think twice before offering the products.

"It's very scary," said
Peter Langelier,
an agent in Maine. "There is nothing in insurance-licensing that prepares you as a nonmedical person to diagnose dementia."

Some agents said the Neasham case is compelling them to scale back sales of indexed annuities even as demand is cresting. Historically low interest rates and a volatile stock market have helped draw buyers. Sales have more than quadrupled in the past decade, swelling to $32.2 billion in 2011, according to Limra.

"The case will definitely have a chilling effect," said
Larry Rybka,
chief executive of ValMark Securities Inc. in Akron, Ohio, which includes an insurance brokerage. Mr. Rybka fired off a memo last month on the case to his firm's internal compliance and marketing teams, reinforcing instructions to make sure brokers warn prospective buyers of the withdrawal penalties and other features. The firm for years has discouraged agents from selling certain indexed annuities. Now Mr. Rybka wants them to sell even fewer.

Arthur Rudnick,
a White Plains, N.Y., agent, said the case will be "in the back of my mind" with elderly clients, and, "more so than ever, I'd be willing to walk away from a sale." He added: "Anybody who has common sense that is aware of this case will come to the same realization."

So far, insurers say they aren't seeing a sales decline, though agents are calling with questions.

"Indexed annuities protected people during the 2008-2009 downturn," said a spokesman for a U.S. unit of
Allianz SE
,
which issued the annuity at the heart of Mr. Neasham's case. "They didn't lose principal, and more people are seeing the value of that protection."

In the mid 2000s, private plaintiffs and state attorneys general sued insurers for alleged unsuitable sales of the products to elderly people who lost money because of the withdrawal penalties. To resolve the suits, insurers agreed to better screen buyers for financial suitability, among other changes.

In an interview, Mr. Neasham said the elderly woman,
Fran Schuber,
arrived at his office with her longtime octogenarian boyfriend, who had bought an indexed annuity from Mr. Neasham years before.

The boyfriend,
Louis Jochim,
said in an interview that Ms. Schuber knew he was pleased with his annuity and wanted one as an alternative to a bank certificate of deposit. Ms. Schuber "was mentally competent," Mr. Jochim said.

The criminal case, under a state law specifically protecting elderly people, is rooted in what happened next: Ms. Schuber and Mr. Jochim went to a local bank to withdraw $175,000 for the purchase. A bank manager then notified California's adult-protection officials, saying the woman seemed confused and influenced by Mr. Jochim, court filings show.

Lake County Senior Deputy District Attorney
Rachel Abelson
said in a court filing there was "sufficient evidence presented [at trial] to show that Fran Schuber was not capable of consenting to the transaction in question and evidence showed that [Mr. Neasham] knew that at the time." In an interview, Ms. Abelson said a $14,000, or 8%, commission "played into his criminal intent."

Had Ms. Schuber pulled her money out within the first year of ownership, she would have had to pay a penalty equal to 12.5% of the principal, according to Allianz.

Allianz cleared the sale as financially suitable after the woman signed a form stating she had sufficient liquid assets, the company spokesman said. Such reviews aren't intended to diagnose dementia, he added.

By last year's trial, Ms. Schuber was too ill to testify. The annuity was cashed out in January by Ms. Schuber's son, Theodore, who was named her conservator last September, said his attorney,
Mary Heare Amodio.
Allianz returned the principal with interest and no penalties, Ms. Amodio and the insurer said.

As his April 18 reporting date to Lake County Hill Road Jail approaches, Mr. Neasham said he has had "really bad dreams" about going behind bars. Once earning $500,000 annually, he now seeks donations for legal fees.

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